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Do you ever talk to your accountant about your investments?

Posted by admin on April 5, 2010 in Taxes

Most of us have a familiar pattern when we visit our accountants this time of year: drop off paperwork, call to make an appointment, attend their office, ask how much our tax refund/taxes owing are, pay their bill and go home. Repeat annually. While we do pay our accountants to minimize our taxes, how many of us ask them about our investments or our investment strategy?

The point is not ask your accountant whether to invest in bonds or stocks or where they think the price of oil will go. Instead, the exercise is to determine how tax efficient or tax inefficient your investments are.  Fees, inflation and taxes are the trinity of factors reducing any investor’s return. There are products which address the first two factors- mainly low cost ETFs and real return bonds, but tax efficiency requires a much more individualized solution than purchasing a flow through shares or other tax friendly vehicles.

Since tax rates, income splitting, loss carry forward and loss carry back rules tend to vary from jurisdiction to jurisdiction, one cannot simply pull a tax friendly product  off the shelf (setting aside whether such a vehicle may eventually be subject to audit scrutiny if found to be too taxpayer friendly) and believe the solution has been found.  While a tax reduction product (for lack of a better term) may possibly reduce taxable income, is the reason why taxable income is higher than desired is because the taxpayer/investor has the wrong products in the wrong place?

In a nutshell, there are different tax treatments for interest/salary, dividend income and capital gains/capital losses. Taxation policy tends to favor the taxpayer investing in businesses. Hence, there is favorable tax treatment if the taxpayer sells stocks for a profit (whether publicly owned or privately owned). The return for our savings, in the form of interest income, is penalized with a higher tax rate (leading to a law of unintended consequences which I will address in a future post).  Since most investment advisors do not complete their client’s tax returns, the tax effect of products  can be glossed over in product selection.

Having spoken to some accountants about this topic, the general consensus seems to be that most taxpayers ignore the tax implications of their investments. Too many interest bearing products are in non-tax deferred accounts resulting in, after inflation and taxes, a de facto negative return. For taxpayers who are employees, and do not have the full range of deductions available as business owners, there is less tax planning flexibility to reduce such oversights and/or errors.

As a practical tip, after reviewing your taxes with your accountant, think about arranging a time to see your accountant after the tax season and show them your investment portfolio. The key is not to focus on whether they think you bought the right product but whether your over-arching strategy and tax implications of your product selection make sense given your income, life-stage and tax history.